Tuesday, August 30, 2011

THE STORYImagine, if you will, a man who is trying to find the ideal woman to marry. We’ll call him Bob.

Bob does a great deal of research into determining the characteristics of a great wife. Then he does research into where to find women with these characteristics. Finally, Bob applies “proven” tools for approaching these women.

Unfortunately, Bob has absolutely no luck in convincing any of these women to become his wife. In frustration, Bob complains to one of his friends, “I don’t understand why I am not having success finding the ideal wife. I’ve done all the research and used all the accepted techniques. I found the great women, but none want to be my wife. What am I doing wrong?”

Bob’s friend answers, “Take a look at yourself. You are obesely overweight. You are unemployed. Your personality is rude and obnoxious. You are sloppy and ugly. Until you fix up your own act, no woman will be interested in you.”

“Hmmmm,” says Bob. “I’ve spent so much time looking for the right woman that I never spent any time looking at myself.”

THE ANALOGYLooking for great business opportunities can be a lot like looking for that perfect spouse. You can do all the research (like Bob did) to determine what the characteristics of a great opportunity are (like high growth, large demand, good margins, low competition, etc.). Then you can do the research to find out where those types of opportunities exist (like emerging economies, or social networking businesses, or green technology). And then you can apply proven techniques to try to get into those great business opportunities (acquisitions, alliances, etc).

And you can still fail miserably, just like Bob.

And the failure may have nothing to do with all that research you did. The problem may be that instead of focusing entirely on looking for opportunities, one needs to occasionally focus on one’s self. Look in the mirror at your own business. Do you have the proper qualities to make the deal work? What are you bringing to the opportunity which adds value? Does your company look to others like Bob—totally undesirable?

It takes two to make a great marriage. Don’t forget your part in the deal.

THE PRINCIPLEThe principle here has to do with strategic fit. A supposedly great deal may actually be a terrible deal if there is no strategic fit. Even if the opportunity has all the characteristics typically associated with success, it can still be a miserable failure in the wrong hands (no strategic fit). Therefore, when making strategic assessments of potential opportunities, do not look at them in isolation, but in the context of their fit with your organization.

This point was driven home to me in a recent study issued by the Corporate Executive Board. Their report said:

“Despite strategists and senior managers having spent decades on emerging markets strategy, they still spend too much time trying to understand the market and not enough on understanding whether their firm is ready for that market. Our research on over 1,000 market entry examples shows that this mistake is made over 70% of the time.”

In other words, right now emerging markets are the pretty girls that the guys want to marry. But just because the woman looks attractive to you doesn’t mean that you look attractive to the woman. This may seem obvious. However, since businesses are making this mistake of going in ill-prepared over 70% of the time, the idea must not be as obvious as I think.

I’m not saying that these companies are failing because they are bad companies. They just aren’t ready for the opportunity because of a poor fit.

Jigsaw puzzle pieces aren’t inherently good or bad by themselves. What makes them good or bad is whether or not they properly connect with your puzzle piece. If the pieces fit together, everything is good. If not, then the piece is not useful to you—even if it is very useful to someone else.

So what can we learn from this?

1) First, Look In The MirrorBefore going on a strategic quest for the ideal new opportunity, take time to first look into a mirror. Research yourself before researching others. Until you know what you look like, you won’t know what opportunities will fit. Ask yourself questions like these:

a) How can I add value to an opportunity?

b) What is causing me to be successful in some of my current businesses? Is it a particular skill I bring to the marketplace or is it a particular type of characteristic of the marketplace itself?

c) What is causing me to have problems in some of my businesses? Is it the lack of a skill or is it the wrong type of marketplace?

d) Where can I succeed better than others? (Differentiated Skills, Competitive Advantage)

e) Where does my expertise lie? Am I better at a particular stage of a lifecycle (start-up vs. growth vs. maturity)? Am I better with particular value positions (low price vs. high service)?

f) What is the best cultural fit for me?

Based on the answers to these questions, you can now know what are the right criteria to look for in new business opportunities.

2) Don’t Get Seduced By the Hot FadAt any point in time, there are hot fads in business investments. “Common Knowledge” tells everyone that these are the places to be, so businesses flock to them. As the Corporate Executive Board points out, a current hot fad is getting into emerging markets (like China or Brazil).

Yes, a lot of money will be made in these hot markets. It is also true that many companies will lose a lot of money going after these hot markets. In fact, most companies will fail. Only a few companies (like Amazon) succeeded in the first dotcom bubble. Most died a horrible death.

So just because a market is “hot” does not mean that success is a given. Hot markets can also burn the company that is not prepared or not a good fit.

Therefore, do not get seduced into thinking that you have to pursue particular opportunities just because they are the hot place to be. Don’t think that just because all of your peers are pursuing a particular strategic path that you have to do the same thing.

Instead, look for the opportunities which fit well with what you do. Perhaps your best opportunities lie far away from the current fad.

3) Make Yourself Presentable Before Diving InSometimes, an opportunity might have great potential for you, but you are not ready yet for that opportunity. If Bob was going to lure a great wife, he was first going to have to lose some weight, get a job and improve his personality. Your company may need to do something similar.

When McDonalds was beginning to grow internationally, they ran into a problem. They wanted their hamburgers and french fries to have the same quality and taste as in the USA. However, these other nations did not have access to the proper types of cattle and potatoes to make that happen. Therefore, before they could build their restaurants, McDonalds had to spend a great deal of time working with the local agricultural infrastructure. They had to convince the local farmers and ranchers to use McDonalds-style cows and potatoes and raise them in the proper manner.

Until McDonalds got the infrastructure in place, they were ill-prepared to build their restaurants globally. If they had just rushed in with the restaurants (before fixing the infrastructure), they may have failed.

If you find a great opportunity, determine what you need to be successful with it. Then look at what you have to offer. If you are missing something (as McDonalds was with infrastructure), then work on filling that gap before diving into the opportunity. Don’t be like the 70% in the study who fail to spend the time to become appropriately prepared.

SUMMARYA key aspect of strategic planning is to find future growth opportunities. As important as this is, don’t become so focused on looking outward for opportunities that you fail to look inward at yourself. The best opportunities are the ones that fit with who you are (or who you can be). Preparing yourself to win can be more important than finding a so-called “winning” opportunity.

FINAL THOUGHTSThe more you strengthen your core competencies and skill sets, the more places there will be where you can find additional opportunities to succeed.

Tuesday, August 23, 2011

THE STORYEarlier this week I flew to Kansas City. We started to fly into some turbulence and the plane began to bounce around. The pilot’s voice came on the intercom to say that there was a major storm ahead in Kansas City. He hoped to change the flight path in order to get us into Kansas City and avoid most of the storm.

A little while later, the pilot’s voice came on the intercom again. This time he said that the plane did not have enough fuel to circle Kansas City until it would be safe to land. Therefore, the plane would be diverted to Omaha for refueling.

This was a little disconcerting to me, because I was doing a one-day trip to Kansas City (in and out in the same day without spending the night). If I missed my meeting in Kansas City, then the whole day would be a waste of time.

Fortunately, with a little bit of rescheduling, everything worked out just fine.

THE ANALOGYTurbulence doesn’t just cause problems for the paths of airplanes. Turbulence can also cause problems for businesses traveling along strategic paths.

Whereas airplane turbulence comes primarily from storms, strategic turbulence can come from significant changes to any of Porter’s five forces—changes in the competitive mix, changes to suppliers or customers, new technology, or a change in the environment. If any of these changes are large enough, they can make your strategic journey a bumpy ride.

When the strategic turbulence appears, there may be a clamoring among your executives to immediately abandon the current strategy and start all over again with a new one. “THINGS HAVE CHANGED!” they may shout. “WE NEED TO CHANGE THE STRATEGY!”

This would be like airplanes changing their destination every time they hit a little turbulence. Anyone who has flown a lot knows that in the vast majority of cases, planes find a way to safely deal with the turbulence and still reach their intended destination. Most of the time, there is no need to change the destination.

And that’s a good thing. Do you have any idea what kind of chaos would incur if every plane kept changing its destination for every instance of turbulence? The negative ripple effects would be huge. People and planes would end up in the wrong places. Connections would be missed. Costs would skyrocket. It’s not a good approach for airline turbulence or for strategic turbulence.

Another reaction of executives to strategic turbulence might be to say, “Look! Things never go exactly as planned. Situations keep changing. Therefore, planning is worthless. We should stop doing it.”

Of course, that would be like airlines saying that because turbulence occasionally occurs, the airlines should abandon the idea of scheduled flights and stop filing flight plans. They should just leave the airports when convenient and decide on where they are going once they are in the air. Again, another bad idea for both airlines and businesses.

Yes, sometimes turbulence gets so bad that airlines need to change the destination (as they did for me this week). But that is the rare exception. And it should be the same for strategic turbulence.

THE PRINCIPLEThe point here is that there are a lot of ways to deal with strategic turbulence. Immediately changing the entire strategy or abandoning strategic planning altogether are usually among your worst options.

Don’t Rush to Abandon Strategies at the First Sign of a StormJust as most weather-related turbulence is not sufficiently strong enough to justify an airplane abandoning its destination, most changes to Porter’s Five Forces are not sufficient to cause one to completely abandon a strategy (provided you had a great strategy to begin with). We will illustrate this by assuming we are a company with a successful luxury strategy who has entered some strategic turbulence in the form of an economic recession.

A recession will cause some near-term rocky times for a luxury strategy. Spending will go down. Profits may take a big dip. But does that mean one should abandon the luxury strategy position? A lot of time and effort and money has gone into building that luxury position. To walk away from that position would be to abandon all that effort and start over. The old customer segment would be confused and the new segment would be suspicious. During the transition from the established position to the new position, the position in the marketplace would be weakened.

And then, when the recession is over, and you want to go back to the old luxury position, you may not be able to do so because of your repositioning during the recession. It’s hard to regain a luxury image once it is lost.

Frequent strategic upheavals and change have about the same impact as having no strategy at all. All that change confuses the marketplace as to what you stand for. As a result, you end up standing for nothing.

Unless you believe that the recession will be so long and so severe that the luxury segment will utterly disappear for many, many years and never return with any significance, then one must conclude that over the long run a luxury position is viable. And if you already are successful in that segment, it is unlikely you will find a better position which justifies all the costs involved in switching.

This is not to say that you should do nothing when turbulence comes about. Turbulence probably requires a modification of tactics. But those modifications should not be random. They need to stay within the context of the greater strategy.

Yes, the airlines make some changes to get through a storm. But those tactical changes are designed to find a better way to reach the old destination (given the new near-term situation). The same idea applies to business. Rather than immediately changing the strategic destination, look for ways to adapt your tactics so that the old destination works best while in the turbulence.

Changing AltitudeOne thing planes tend to do when they confront turbulence is to change their altitude. In other words, instead of flying directly into the heart of the storm, they try to go above or below the worst of it.

A similar tactical change for business would be to basically stay the course but adjust the magnitude of activity in a given area—going either higher or lower in intensity. For example, the luxury company in the recession can change the magnitude of a number of factors to help avoid the worst of the impact of the recession.

The levels of production might be lowered. Payroll might be cut. Marketing expenses might rise to try to gain a larger share of the temporarily smaller pie. The idea is to essentially do similar things, but at a different level more appropriate for the times.

Changing PathIf changing altitude is not enough, planes will alter the path. They still are trying to reach the same destination, but taking a slightly different flight path to get there. The equivalent approach for businesses would be to make more substantial tactical changes than merely changing the magnitude.

For example, the luxury company may conclude that lower end of their customer mix (those aspiring to become wealthy) is most severely impacted by the recession. Therefore, the mix is modified to shrink the aspirational products and focus more on the upper end (where the recession has less of an impact).

Or maybe the luxury products are temporarily redesigned so that they require less expensive inputs of labor or material. Maybe the luxury clothing uses slightly fewer embellishments or emphasizes a less costly fabric (while still maintaining a luxury look and quality level). Or maybe the latest designs in luxury art-glass use a little bit less of the expensive glass. The idea is to adapt to the recession by doing different things that make it easier to get through the recession without destroying the essence of the core strategy.

Take the BumpsSometimes the best alternative for the plane is to just go through the storm and accept the fact that it will be very bumpy for awhile. That can also be true for businesses. If there is a multi-year aging process involved (as with some luxury liquors), there may be little you can do to production levels in the short run. If quality labor is in short supply, you may not want to alienate them through temporary layoffs. If you have important contractual arrangements with key, irreplaceable players, you may not have much flexibility to make short–term adjustments. Hence, to support the overall strategy there might not be much you can change in the short-term. You just have to ride out the storm.

SUMMARYTurbulence should not be used as an excuse to abandon strategic planning or to hastily make random radical changes to strategic direction. Most turbulence is temporary or not sufficient enough to make a strong position obsolete. Usually the best course is to maintain the same strategic destination, but merely make tactical adjustments. This could be by changing the levels of magnitude in your current tactics, or in doing different tactics altogether. The key is ensuring that these changes reinforce one’s overall strategy rather than weaken it.

FINAL THOUGHTSOf course, as I learned when my flight was diverted from Kansas City to Omaha, some turbulence is large enough to require a total reset of strategy. For example, if you are the leader in analog photography when the world is switching to digital imaging, there is little you can do to keep your business model relevant. The change is too great. A new destination is needed. Therefore, it is important to accurately assess the magnitude of the turbulence before making any decisions about what to do. And it is better if you start that work early, before you enter the storm.

Wednesday, August 17, 2011

THE STORYThere are lots of stories written and movies made about feuding families in rural areas. A common tactic used to attack the enemy in these stories family was “poisoning the well.” What would happen was that one family would sneak onto the other family’s property. They would then do something to the well water or reservoir of their enemy with the intent of either drying up the source of the water or making it unfit to drink. This was called poisoning the well.

This was a particularly nasty tactic, because if a farmer or rancher doesn’t have access to good water, their livelihoods are ruined. Not only is there nothing for the family to drink, but nothing to feed the cattle or water the crops. The family who was attacked in this way had few options. Often they just had to give up and move somewhere else.

What makes this tactic even scarier today is the fact that it is not that difficult for a terrorist to “poison the well” of major cities. Using modern chemistry, it wouldn’t take much for a terrorist to cause the major sources of water for huge cities to become unfit to drink. Suddenly, that old tactic takes on new significance.

THE ANALOGYA similar situation occurs in the business world. However, instead of the well or reservoir being filled with water, it is filled with cash. Just as water is needed to keep the cattle healthy and the crops growing, cash is needed to keep the company healthy and growing. Cutting off the flow of water can ruin a farm or ranch. Similarly, cutting off the cash flow to a business can ruin it.

And just as the families in these movies and books had enemies, so do businesses. And if a company makes a strategic error, they can create a situation in which competitive forces “poison the well” of cash for a business. This can be so ruinous to a firm that the company can no longer exist.

Therefore, a key component of strategy needs to be protecting the well of cash so that it does not get poisoned.

THE PRINCIPLEToday’s principle has to do with where the emphasis should be placed when looking at the strategic aspects of a potential acquisition. I believe that, in general, too much focus is placed on potential synergies from the acquisition (ways to boost cash) and not enough time is spent looking for the potential of the acquisition to poison the well of cash (ways to destroy cash).

As we will soon see, acquisitions can trigger competitive events which may cause a poisoning of the well. Since the purchase price in an acquisition is typically linked to the value of future cash flows, any poisoning of the well seriously diminishes the value of that acquisition (because there will be far less cash after the poisoning). It can cause you to grossly overpay for the acquisition if you do not take this into account during due diligence.

Ways in Which Acquisitions Can Poison the WellThere are many ways in which an acquisition can poison the well. For example, let’s assume you want to acquire one of your suppliers. That supplier may also be supplying your competitors (your enemies). The enemies will not want to do anything to help you, so if you buy that supplier, they may take their business with that supplier elsewhere. In other words, your ownership of that supplier can trigger competitors to take away their business and reduce the supplier’s cash flow. You have poisoned the well.

Let’s say you want to acquire your distributor. Suddenly, many of your enemies who also use that same distributor may no longer want to use them because they do not want to help a distributor owned by their enemy. Again, the cash goes down due to ownership change. You’ve poisoned your well.

Let’s say that you want to acquire a direct competitor. It may be that a lot of the customers using that competitor were doing so specifically because they did not want to give their business to you. Once you buy that competitor, it becomes a part of you. Therefore, the customers who were trying to avoid you will take their business away from the company you want to acquire. The well is poisoned.

I spoke about this concept in more detail in a prior blogs (here and here). You may want to go back and review them.

Synergies Aren’t As Great As One ThinksGiven the high potential for ruinous poisoning, you’d think that more attention would be given to it. Instead, my experience has been that the bulk of the strategic focus in acquisitions is around synergies.

Synergies are good and they should be looked for, but if we focus too long in this area, we may delude ourselves into seeing more synergies than really exist. Lots of studies have looked into why most acquisitions fail. One of the key conclusions which keeps coming up is that acquisitions rarely achieve as many synergies as one thinks prior to the deal. Apparently, much of that time focusing on synergies was focusing on illusions which will not occur. They deceive us into seeing more value than there really is.

Worse yet, all that time spent on the optimism over synergies may keep us from spending enough time on the pessimism of potential well poisoning. Too much optimism combined with not enough pessimism leads to grossly overvalued estimations of cash flow. The result is that companies pay too much for an acquisition and destroy company value.

The Google – Motorola Mobility DealThe principle of poisoning the well can be seen in the potential acquisition of Motorola Mobility by Google. Does Google have enemies? Yes, indeed. There’s a reason why Microsoft filed a complaint with the European Commission back in April 2011, alleging that Google was engaged in illegal anti-competitive activity. There is a reason why several companies which don’t usually work well together (Apple, Microsoft, Research in Motion and Sony) combined to outbid Google for Nortel’s intellectual property back in July. They don’t like the power of Google and they want to keep Google from getting stronger.

Then comes the announcement that Google wants to acquire Motorola Mobility. As it turns out, not only does this action give Google’s enemies a chance to poison the well, it also gives Google’s “friends” an opportunity to poison the well.

For example, Microsoft is expected to use this event to tell people in the industry that they cannot trust Google and should put more of their priorities into the Microsoft/Nokia system. This can poison two wells. First, it can take sales that would have once gone to Motorola Mobility and shift them to Nokia. Second, it can make a higher percentage of phones carry the Microsoft software instead of Google’s Android system. The Microsoft system will shift more mobile advertising revenue to Microsoft (through Bing and other sources) which could really hurt Google’s cash flow.

Worse yet, this just might be enough of a boost to Microsoft to give them critical mass in the mobile marketplace, something they can build on and grow. Perhaps if Google had not announced this deal, Microsoft would have eventually given up on the mobile software due to insufficient demand. A similar situation could occur with Research in Motion, who might have eventually gone away, but now may have a chance to revive itself through the poisoning of Google’s well.

Even Google’s device partners (“friends”) in the mobile space (Samsung, LG and HTC) may now become less enamored with their partnership with Google. They may begin to think that Motorola Mobility will get preferential treatment over their own devices. As a result, they might hedge their bets by getting closer to Microsoft, shifting share away from Google’s Android.

If less of the really cool devices (from Samsung, LG, and HTC) carry Android, and if Motorola Mobility puts Android on inferior devices, then consumers may revolt and switch away from Android. Again, more poisoning of the well.

And if Android starts losing significant market share from all these poisonings, it may have less influence in getting priority for cool apps from the development community. This could start a downward spiral, as even more customers see a reason to switch to others who have cooler apps sooner.

The point here is that this type of deal can cause all sorts of negative poisoning of the well. I hope Google fully considered these ramifications when contemplating the deal.

SUMMARYAcquisitions do more than create positive synergies. They can also trigger negative impacts on cash flow (poison the well). Since the true amount of synergies in a deal tend to be less than expected, and the poisoning of the well can be larger than expected, strategic emphasis during acquisition may need to shift from synergy to poisonings.

FINAL THOUGHTSIn the old stories, it was the enemy who poisoned the well. In business, we tend to poison our own well through poor strategic decisions. Shame on us! This is a preventable problem, because it is under our control. Make sure you consider the potential for poisoning the well whenever you contemplate a move which upsets the status quo.

Monday, August 15, 2011

THE STORYBack when I was in college, I sometimes got around by hitchhiking. One time while hitchhiking, a driver got me started on my long trip by taking me as far as an exit on an interstate highway.

It was great to get to the interstate highway. I had planned on taking that highway for quite a distance. Unfortunately, I was left at an exit which received virtually no traffic. I stood there quite awhile with absolutely no cars driving by.

After a very long wait, I eventually found someone willing to pick me up. That was quite a relief, because after a couple of hours, I had only seen three cars on that entrance ramp.

THE ANALOGYThe good news was that the first ride on that hitchhiking trip got me to the road I wanted to take. The bad news was that it took hours before I could get moving on that road. I could see that road in front of me, but I had no way to take advantage of it.

Sometimes, a similar thing happens in strategic planning. The strategy process will determine the right strategic path to take and then consider the strategy job to be finished. It was now up to someone else to implement the process to get down the path.

It’s as if the strategists see their job as being like the first ride I had on that trip. That first ride got me to the road and just left me there. I quickly learned on that trip that being at the road was not the same thing as being able to take advantage of that road. I knew it was the right path, and I could see it in front of me, but I was making no progress, because my first ride abandoned me as soon as I got to the highway.

If all your strategic process does is get the company to see the path, and does not help it move down the path, then your company may get stuck for a long time, just as I was stuck at that entrance ramp.

THE PRINCIPLEThe principle here has to do with how one defines success. Since we tend to work in such a manner as to achieve success, then the nature of how we define success has a great determination on what one actually does.

For example, if a company defines success for the strategist as merely coming up with a fully-designed strategy, then “success” is achieved the moment the strategy design is concluded. By this definition, strategy implementation is not necessary to achieve “success.” Just having a plan is reason enough to celebrate a successful conclusion, even if it is poorly (or never) implemented.

It’s easy to see why such a narrow definition of success comes about. After all, it seems reasonable and fair to reward people based upon outcomes which are under their control. And the strategists have meaningful control over the strategy design process.

Similarly, it seems a bit unfair to hold people accountable for outcomes which are out of their control. And strategists are rarely the primary driving force in charge of strategy implementation. So why hold a strategist accountable for an outcome they do not manage?

The problem though, as we will soon see, is that this narrow definition of success may not be in the best interest of the company. It also may not be in the best interest of the strategists.

Bad For the CompanyThey are many ways in which defining success for strategists as merely creating a plan is bad for a company. First, it tends to focus the strategist on the quality of the process rather than the quality of the output. After all, if success is achieved at the moment a plan is approved, then success is achieved faster (and more efficiently) with an efficient planning approval process. The focus shifts to creating a slick, standardized process. Just fill in the forms, hold the meetings, make the presentation, and then you are done! Success!!

It’s easy to put together a process to create an impressive-looking planning document if you don’t have to worry about how good the plan is, or how difficult it will be to implement, or if the strategy will work after implementation. Unfortunately, these latter issues are very important to the company’s ultimate success.

A company succeeds only if the plan succeeds. And a plan only succeeds if it is both a) worth implementing; and b) is actually implemented. Otherwise, the plan is worthless.

If you broaden the definition of success to include these other issues, then strategists will spend more time on them. I would suspect that the type of plan you get would be different. The process might get messier, but the plan will be better. Even if the strategists have only a minor role in the actual execution, if they are held more accountable for execution, they will create a plan which is easier to execute. Similarly, if they are held more accountable for the effectiveness of the plan when executed, they will create a plan which is more effective if implemented.

A second problem with the narrow definition of success is that it tends to isolate strategic planning from the rest of the business. Creating a strategic plan just becomes another thing which needs to get done (and not the primary responsibility of the operators of the business). Once the plan is designed, you can check it off the “to do” list as a successful completion. Then the focus of the company moves on to the next item on the list. It is just sort of done and forgotten, because no connection is made between making the plan and running the business.

If the day-to-day decisions are totally divorced from planning decisions, then the contents of the plan become irrelevant. After all, a company’s long-term execution is merely the sum of all the decisions it makes on a daily basis. If the daily decisions ignore the strategic implications, then the strategy never becomes a part of how things get done. As a result, the company never benefits from the plan, because it merely sits on a shelf, rather than being a major influence on how the company acts on a daily basis.

The strategist needs to be present not only at the place where the plan is designed (getting to the road), but at the place where key operational decisions are made (driving down the road). Otherwise, the company may end up like a hitchhiker stuck in place because it can’t find the right way to get down the road.

Bad for the StrategistsIt’s not just the company which suffers under the narrow definition. The strategists suffer as well. First, if the rest of the company sees strategists as primarily responsible for the strategy process, then that is how the strategists will be measured. Bonuses will be based on things like making sure all the parts of the process get done and get done under budget. This can be a horrible way to make strategy and it wastes a strategist’s resources.

Good strategic positions and broad strategic objectives shouldn’t change all that often. For example, the basic plan for Wal-Mart is low cost/low price. That hasn’t changed in decades. The basic plan for Apple is cool devices doing cool things in cool ways. That hasn’t changed in years, either.

Going back to square one every year to complete the entire planning cycle in these cases is a waste of time and effort, because the core strategy will not change. You are better off rotating through key strategic issues related to the enduring plan already in place. But if the strategist is judged on revisiting the plan every year (and concluding it is still good), then the time for getting at the key strategic issues is lost. The strategist’s talents are wasted.

Worse yet, if companies see the plan in place as rather enduring, and they believe that putting the plan in place is all a strategist is good for, then they will see no need to keep strategists around. The idea would be that as long as “low cost/low price” is working for Wal-Mart and “coolness” is working for Apple, there really is no need to even have any strategists around. In this case, the strategist is fired.

It is like that hitchhiker story. Once the driver (the strategist) gets you to the road, they are cast off as unnecessary. The company (as the hitchhiker) will find another way to get down the path without you. And as long as they keep traveling down that same road, they will see no reason to get another strategist.

The strategist then loses his/her ability to influence the actions because they are not around. So, not only is the strategist unemployed, he/she is unable to keep the plan relevant. That makes the actual plan seem even less valuable, making it harder to get rehired to do it again.

SolutionAs a result, it is in the best interest of both the company and the strategist to keep planning work and daily operational work more intertwined. That way, the company gets a better implementation of a better (more relevant) strategy. In addition, the strategist gets a more fulfilling (and longer-lasting) job. And the best way to keep the work intertwined is to use a broader definition of success for the strategist which includes aspects of implementation.

SUMMARYThe value of a strategy is not in having a plan on a piece of paper. No, the true value of a strategy is in its ability to improve the outcome of the business. Therefore, strategic success should be defined based on how well a plan improved a business instead of on how efficiently it was designed.

FINAL THOUGHTSIf the company sees no need to take the strategist along on the journey, then the company will not get timely information about problems up ahead on the road. By the time they realize that the road they are on is no longer any good, it may be too late to get back on track.

Monday, August 8, 2011

THE STORYRecently, I was watching an old movie from 1992 on DVD, called “The Player.” The movie is about a guy who works at a movie studio. His job is to listen to writers pitch ideas for new movies. He hears thousands of pitches each year.

Because he has to listen to so many movie ideas in such a short time, he keeps telling the writers to limit their pitch to 25 or fewer words. Well, it’s hard to describe an entire movie in only 25 words, so the writers use short-cuts. Since everybody in the movie industry knows about all the prior movie hits, the writers explain their plots by referring to the other movies it is similar to.

A common approach used in the movie (and in real life) is for the writer to pick a couple of movies the new movie is like (we’ll call them “Movie X” and “Movie Y”) and then pitch their new idea as “Movie X meets Movie Y.”

Of course, the movie exaggerated the absurdity if you try to combine too many concepts.

In the move, a studio executive is trying to summarize a crazy, convoluted movie idea he’s hearing by saying, “So it's a psychic, political, thriller comedy with a heart.”

THE ANALOGYJust as movies don’t get made unless they are successfully pitched to studio executives, strategies don’t come to life unless they are successfully pitched to management. And just like the movie studios, the business executives you are trying to pitch to are very busy. If you cannot crystallize the essence of the strategy in 25 words or less, the executives may never take the time to grasp what you are talking about.

Therefore, if you want to get your strategy implemented, you need to think and act like those writers trying to get a movie made. You need to use short-cuts—reference points with which your audience is familiar. For example, you could describe your strategy as being like “Competitor X meets Competitor Y,” implying that you want an assortment strategy like company X but add to it the service levels of competitor Y. This short-cut helps management quickly understand what you’re trying to do—in a way that they can easily visualize. And if they like what they see, it is easier for them to implement the plan, because they have those reference points to fall back on.

THE PRINCIPLEThe principle here has to do with reference points. The idea is that reference points can be a strategist’s best friend AND their worst enemy. Therefore, they must be used carefully.

The Benefits of Reference PointsWe’ve already talked about many of the benefits of using reference points when pitching a strategy. It speeds the process, it makes it easier for the audience to understand, and it makes it easier for the audience to implement. These benefits occur because reference point help take an abstract concept more tangible.

For example, Zapmeals had an idea to try to get quality food quickly into the hands of people who didn’t want to waste time sitting in a fancy restaurant. Their idea was to use the internet to connect local chefs (who can provide the great meals) with local people (who want the great meals). To pitch the idea, they used a reference point of a success people were aware of: “eBay for takeout orders.”

The Dangers of Reference PointsAlthough there are many benefits to the use of reference points, there are also many dangers. Reference points refer to what the audience knows. And what the audience knows is what already exists. It is impossible to become an innovative leader if all you are doing is copying what already exists in the industry.

As a result, reference points can keep one locked into minor variations of the status quo, if used improperly. This is particularly true if all of your reference points come from within the industry.

In the worst case scenario, competitors start clustering around the current winning strategies in the industry, because that is the common reference point for success. With all that competition fighting for the same spot, a brutal war for market share will develop. There will be a race for the bottom as everyone cuts prices to gain share. In the end, all will fail.

For example, I knew of a retailer who described his company’s strategy as being like Company X, a direct competitor. I asked him how he planned to differentiate himself that retailer. He really didn’t have an answer. He just saw a successful competitor and wanted to emulate it. The problem was that this competitor already strongly owned that position and there was no way he was going to be able to take the position away from them. Therefore, his reference point was going to make him an inferior imitation—not a formula for success.

Great strategies tend to create business in a space that in currently unoccupied. You won’t find unoccupied spaces if you look for reference points among companies that already occupy a space.

There’s a reason why one finds very few original movies. They all tend to look like other movies you’ve seen before, because the reference points when they were pitched were movies you have already seen before.

Solution: Borrow from Other IndustriesTo get around this problem, one needs to use reference points which come from outside the industry. That way, you get the benefits of a reference point without all the problems which come from copying what is already in the industry.

As Clayton Christensen has pointed out in the Innovator’s Dilemma, most great new innovations tend to come from people who are outsiders to the industry. They are not trapped by conventional industry reference points, so they can come up with something entirely original.

You can do the same, by searching for reference points outside your industry. For example, I was speaking to someone in the banking industry who was using retailers like convenience stores as a reference point. He liked the way mass oriented retail stores created impulse sales through effective signing and display endcaps. He liked the way they could sell a lot through minimal service by creating self-service. He liked the way customers felt comfortable in a convenience store instead of the uncomfortableness people felt in a bank. He wanted to replace those scary desks in a bank with friendly aisles full of financial packages. In other words, he wanted to be “the 7-Eleven of banking.”

So, spend some time looking beyond the walls of your industry. Think about how others do their business. Look for principles you can transfer to your industry.

The idea here is to look for successes in areas totally unrelated to your industry and envision what would happen if you applied their success formula to your industry. It may turn out that a full space in one industry is actually an open space in your industry.

It is so difficult to get management to embrace a strategy in a space that is empty (they say “if it is so good, why is the space empty?”). Therefore, if you can point to tangible examples of other industries where that position is very successful, you have a better shot of selling the idea.

SUMMARYGreat strategies need to be sold before they can be implemented. And it is easier to sell the idea if you can relate it to a concept the audience already understands (a reference point). The trick is to look for comparison insight outside your core industry. Otherwise, you will end up just copying one of your competitors and become a weak imitation.

FINAL THOUGHTSWith over 400 of these blogs, I have shown how easy it is to understand complex strategic principles by finding analogies in unrelated fields. This same approach can be used to sell your strategy. Find a great analogy and then your selling process will be a lot easier.

Monday, August 1, 2011

THE STORYAwhile back, I wrote a book on strategic planning and sent it off to the publishers. Below is a very rough and condensed paraphrase of the type of ongoing dialog I had with the publisher.

Publisher: Your book is very comprehensive and integrated. In one place, it provides a complete approach as to how to do strategic planning.

Me: Thank you for the compliment.

Publisher: No, that was a criticism. Business leaders do not want to buy an all-inclusive, integrated, comprehensive approach to planning.

Me: Why not? Isn’t a comprehensive, all-inclusive, integrated approach the best way to do planning?

Publisher: Maybe so, but for a business person to buy into YOUR comprehensive approach, it requires the reader to abandon THEIR current approach. Business leaders have big egos. They’ve been successful in the past…which is why they are currently a business leader. Therefore, they think they already have a pretty good idea as to how to do things well. All they are looking for is a handful of useful tips they can add to their knowledge base to make them a little better at what they already do. Your book does not do that.

Me: So lists of simple tid-bits about planning sell, but writing about comprehensive planning approaches fail?

Publisher: That’s right.

It was not too long after that conversation that I got the idea to write about planning as a series of short, stand-alone articles. Each would be based on a little story with an analogy. It lead to my book “Strategy is Like Barbeque Sauce,” which in turn lead to my starting this blog.

THE ANALOGYThis same idea for books on planning applies to any other communication about planning. Just as a great integrated book on planning is of little value if the audience doesn’t want to buy it, a great integrated plan is of little value if those who have to implement it don’t want to buy into it.

In writing my first book on planning, I made the mistake of confusing the principles of good planning design with the principles of good planning communication. Well designed plans tend to be complex and integrated—a holistic approach. The idea is to design something where the power of the outcome exceeds the sum of the individual parts. Tradeoffs are made throughout the organization in order to get everything aligned in the direction of competitive advantage. This creates a synergistic strength which is stronger than any individual action and difficult for others imitate.

A great example is Apple. Their success is due to taking a complex and integrated approach to their strategy. They didn’t just introduce another mobile phone. They introduced an entirely new integrated business model—phones, apps, app store, and Apple stores, with cool design and easy integration holding it all together.

My mistake was to think that just because plans should be complex, integrated and holistic, so should be the communication of the planning process. But this fails to take into account the stakeholders of the strategy. Stakeholders like things to be simple and easy. For example, the approach used to introduce the iPhone was very simple and focused on ease of use.

And, as the publisher said, you don’t want to insult the implementation stakeholders or bruise their egos, either. They just want simple lists to add to what they already know.

THE PRINCIPLEThe principle here is that two separate skill-sets are needed to ultimately succeed in planning. One is the skill-set for plan design and the other is the skill-set for communicating the plan execution. The characteristics of these skill-sets are different, and you will have significant difficulties if you confuse the two.

The Two Skill-SetsThe skill set for plan design is all about a holistic, integrated approach. It is about finding a unique way to put all the pieces together in order to win.

On the other hand, the skill set for plan execution is all about simple check lists. It is about dicing up the work into easily managed (and measured) chunks which can be assigned to people (and easily added to their daily work load).

If you don’t believe me about the power of lists, just look at the business web sites which provide lists of their most popular articles. There always seems to be a disproportionately higher number of articles with a number in the title—a number referring to a small checklist. For example, current articles in the American Express Open Forum include:

• The Leader's Checklist For The Startup Manager

• The Best Advice I Ever Received: 3 Top Executives On Tips That Count

• Top 10 Excuses For Not Going Global

• 4 Marketing Ideas That Are Sure To Make A Splash

The problems arise when the checklist approach is applied to design or the integrated approach is used for execution.

Problem #1: Checklists Used During DesignIf check lists are so popular why not use them during the design stage? I’ll tell you why. It doesn’t lead to a good plan design. You can put all sorts of steps on a planning checklist—looking at strengths, looking at weaknesses, looking at the environment, writing mission statements, and so on. If you do each one separately and just check it off when it is done, then the work is not building to a creative solution. At best, you will get some small incremental improvement.

No, if you want truly innovative and revolutionary strategies, you need to change your world view and your thinking on complete business models. You need to rethink the entire process, as Apple did with the iPhone. It is a messy and creative process, requiring one to hold a lot of concepts in one’s head simultaneously. It is not a series of discrete tasks that can be done one at a time. There is a back and forth tug on various trade-off options and scenarios. The secret is in the gestalt—how the parts play together—not any individual piece or pieces.

Just remember the Edsel. Each part of the design of that automobile was individually optimized, like a checklist. The grill was designed separately from the headlights or the hood, or the tailfins, and so on. Although each part was designed well on its own, when all of it was put together on the car, it was a disaster. There was no gestalt. As a result, there was no success.

Problem #2: Integrated Approach Used During ExecutionHowever, just because a holistic approach is necessary for design, it does not mean that the approach needs to continue to dominate through execution (as I discovered with my book). Although the integrated approach may allow people to envision what the whole picture should look like, they may not have a clue as to what their particular role is to make it a reality. The end result can be anarchy. Although a little anarchy is good in the design stage, it is poison during execution.

Unlike the Edsel example, if you instead start by first designing the whole (the gestalt), you can then later begin chopping up the tasks into each part which needs to get done (the opposite of the approach used for the Edsel). The constraints of the gestalt are already known, so the individual work on execution of each part will still work towards creating the greater whole.

By chopping up the tasks into lists, one gets several advantages. First, you can assign responsibility for each task. That way, everyone knows what they are to accomplish. Confusion is eliminated. Second, with responsibility comes accountability. Management knows who to deal with when the execution falls short of intended results. Third, it is easier to develop metrics for each task. That way, you can better measure performance. Fourth, by chopping up the tasks into modules, you can create a more sophisticated time-line for execution. Finally, it is easier to develop a motivational incentive plan when the tasks are more narrowly defined and more specifically assigned.

SUMMARYThe skills needed to design strategy are different from the skills needed to implement the strategy. Strategy design requires a holistic gestalt approach—simultaneously building the design of the entire business model. Strategy execution requires cutting the gestalt into its component pieces (and put on a checklist), so that responsibilities and accountabilities can be assigned and measured. Therefore, strategy design and execution should each be approached differently—using the approach consistent with its unique characteristics. Problems ensue when the approaches are flipped. For example, the individualized checklist will never lead to revolutionary, innovative strategy design. At best you will get incremental advances. At worst, you will design the next Edsel. Similarly, if the implementation is left at only the gestalt level, you will end up with confusion and anarchy, not efficient execution.

FINAL THOUGHTSDid you notice I titled this blog “Three Steps To Success”? If that’s the kind of title that appeals to people, then I’ll use it. Think about that when giving a title to your strategic execution. I know that a lot of successful firms select about three key strategic items they want to accomplish that year and then give them a fancy title like Key Result Areas or Key Strategic Initiatives. If you give a great title to the checklist, it will get more attention during discussions.

About Me

I have over 25 years of experience, having worked in strategy with a number of leading US retailers. You can learn more about me by visiting my digital resume (www.VisualCV.com/geraldnanninga) of the site for consulting (http://planninga-from-nanninga.webs.com)